DP5614 Simulating Stock Returns Under Switching Regimes - A New Test of Market Efficiency

Author(s): David Meenagh, Patrick Minford, David Peel
Publication Date: April 2006
Keyword(s): efficient markets, rational expectations, regime switching, stock returns
JEL(s): C15, C5, G14
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5614

A model of profits switches between four regimes with fixed probabilities; the rationally expected profits stream implies the stock market value. This efficient market model is not rejected by UK post-war time-series behaviour of either profits or the FTSE index.